Variable Annuities and Your Retirement Strategy

Retirement savers are generally wise to take full advantage of the tax benefits that apply to employer-sponsored retirement plans and IRAs. However, because these tax-deferred plans are subject to strict annual contribution limits, many higher-income individuals may not be able to set aside enough money in them to pursue a comfortable retirement lifestyle.

Because a variable annuity is not subject to federal contribution limits, it enables investors to invest more after-tax dollars to supplement the income they could receive from other plans. Taxes on earnings are deferred until withdrawn.

Not only does a variable annuity offer a way to pursue investment gains, but it may offer an opportunity for the contract holder to purchase guarantees (for an additional cost) to help protect against the downside risks of investing in the markets. Examples may include the guarantee of minimum fixed income payments or a guarantee to withdraw a specific amount over a lifetime, regardless of account value. Of course, any guarantees are contingent on the claims-paying ability of the issuing insurance company.

If you are looking for a way to supplement your retirement income and defer taxes on investment gains, a variable annuity could play a key role in your retirement portfolio.

Market Exposure with Potential Gains

A variable annuity is a long-term investment vehicle designed for retirement purposes. The contract holder agrees to make a single payment or a series of payments to an insurance company in exchange for a future income (typically in retirement). These payouts can be structured to last for the rest of the contract holder’s lifetime.

During the accumulation period, the contract holder invests in a variety of investment subaccounts according to his or her risk tolerance, long-term goals, and time horizon. In this way, the investor can participate in the growth potential of the stock market. Of course, the future value of the annuity and the amount of income available in retirement depend on the performance of the subaccounts selected.

Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered. The investment return and principal value of an investment option are not guaranteed.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Withdrawals reduce an annuity’s death benefit and values. Only the earnings portion of variable annuity withdrawals is taxed as ordinary income; withdrawals made prior to age 59½ may be subject to a 10% federal income tax penalty. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Investors should consult with their own professional advisor regarding the potential tax, estate, and legal considerations that may arise in connection with entering into a life settlements transaction. Proceeds from a life settlement transaction may be taxable under federal or state law to the extent the proceeds exceed the cost basis. The proceeds from a life settlement transaction may be subject to claims of creditors. The receipt of proceeds from a life settlement transaction may adversely impact eligibility for government benefits and entitlements. The amount received for the sale of the Policy may be impacted by the circumstances of the particular purchaser of the Policy, the insured’s life expectancy, future premiums, the death benefit, the terms of the Policy, and the current market for insurance policies, among other factors. The amount received for the sale of the Policy may be more or less than what others might receive for the sale of a similar policy. There may be high fees associated with the sell of a Life settlement.

Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as a financial planner.